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June 12, 2013

First Allied’s Surprise Sale to Real-Estate Group Creates ‘Whole New Dynamic’ for BDs

Flush with cash, more conglomerates that sell REITs could follow in buyer Realty Capital’s footsteps

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A group led by real-estate investor Nicholas Schorsch said early Wednesday that it planned to buy independent broker-dealer First Allied Securities from its private-equity owner Lovell Minnick Partners, which has owned a majority stake in the IBD for less than two years.

“This brings a whole new dynamic to the broker-dealer world,” said Jonathan Henschen (right), president of the recruiting firm Henschen & Associates, in an interview with AdvisorOne. “It’s like in the ’80s when insurance firms were buying broker-dealers, but now maybe its real-estate conglomerates flush with money that will be buying BDs.”

First Allied’s buyer is RCAP Holdings, which owns Realty Capital Securities, a wholesale broker-dealer and affiliate of American Realty Capital Properties (ARCP) and several other entities.

It is led by Schorsch, William Kahane, Michael Weil, Peter Budko and Brian Block. "In 2007, my partners and I perceived an opportunity to build an open architected, wholesale broker-dealer to distribute best-in-class investment solutions," Schorsch said in a press release.

"Today, RCAP Holdings takes another step forward,” he said. “We believe that the challenges and opportunities we witnessed in the wholesale distribution channel exist in the broader retail network as well, and we see value and opportunity for growth in a paradigm shift toward a sustainable direct relationship between the mass affluent investor and their independent financial advisor."

San Diego-based First Allied, which acquired the Legend Group in late 2012, includes a network of about 1,500 independent financial advisors with more than 300,000 clients and over $32 billion in assets. In 2012, its revenue totaled about $233 million, with the average fees and commissions per advisor at $293,000 and average assets per rep at $29 million, according to Investment Advisor's 2013 Broker-Dealer Reference Guide.

"Lovell Minnick was a great owner for First Allied," said Chip Roame (right), managing principal of Tiburon Strategic Advisors, in an interview. "First Allied, with Lovell Minnick capital, was able to make several tuck-in acquisitions and also expand through the acquisition of clearing firm Legend ... RCAP in some ways is just a new capital partner, replacing Lovell Minnick."

Unexpected News

“I’m surprised," Henschen said. "Lovell Minnick has only owned First Allied for a year or so.” Private-equity firms usually hold onto BDs for four or five years and then sell them at a profit or build them up to scale and go public, he says.

This was the case with LPL Financial (LPLA), for instance, which was owned by TPG Capital and Hellman & Friedman from 2005 to late 2010, when LPL had its IPO.

“Lovell Minnick was probably offered a pretty good price for First Allied,” Henschen said. “This is something I’ve never seen before. I’ve seen insurance companies buy BDs to distribute products, but this seems like a first for a REIT-focused firm.”

“Speaking as a recruiter, this is good news. It means good financing for broker-dealers,” Henschen said.

Roame agrees. "I like that [First Allied's] management invested $10 million in the deal," he said. "It's a sign of confidence."

Insurance companies have been squeezed by low interest rates, which were high in the ‘80s when they went on their BD buying spree. Today, REITs have been benefitting from interest-rate levels, as investors seeking yield have piled in.

“Insurance companies have been consolidating into their core business,” the recruiter said. “But with interest rates low, people are hungry for yield. Now, real-estate conglomerates can do what insurance firms did in the ’80: buy firms in other areas that they like.”

First Allied CEO and President Adam Antoniades is upbeat on the situation for both advisors and investors, as well.

"Our affiliated advisors will benefit from immediate access to a well-capitalized platform tailored to provide the mass affluent, emerging high-net-worth, and retirement-focused investors with the next generation of industry-leading investment solutions focused on durable income and principal preservation,” Antoniades said in a statement. “Collectively, these investment solutions represent a significant competitive advantage in an increasingly crowded market of financial advice.”

Conflicts of Interest?

Henschen wonders, though, if the coming together of firms that sell REITs and BDs may dredge up some issues that arose when insurance firms were buying broker-dealers.

“Will we see competing products get squeezed out and, at conferences, see the parent companies’ products be given precedent and competing products be given less exposure there and in the wholesaling area as well?” he asked.

“In other words, this situation could present conflicts of interests. We do not know yet.”

The broker-dealer business is not typically as profitable as related businesses, like insurance or REIT sales. “I was with an insurance BD, and we made little to no money [on the BD]. It’s about distribution. We’d make 15% on insurance sales and very little on the BD.”

First Allied, Henschen points out, already works with accredited investors (who have $1.2 million in liquid assets or more) and qualified investors ($5 million or up) on sales of alternative products, private equity and other investments.

“When it comes to alternatives it’s all about due diligence and staying clear of products,” he noted, like certain nontraded REITs. “Some firms, including First Allied, are being more selective and pulling back on the amount of alternatives they work with.”

(First Allied and RCAP were not available to clarify these issues as of press time; however, comments shared late Wednesday will appear online Thursday.)

Other experts say that the deal announced today is interesting and should be followed closely.

“First Allied has always prided itself on its strong commitment to fee-based business and the world of managed money,” said Mark Elzweig, of the executive-search consultancy Mark Elzweig Co. in New York, in an interview. “Nontraded REITs are a wholly different game. I think that First Allied advisors will be very interested in getting a sense of the new owners’ vision for the firm going forward.”